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The Hedging Practice with Chinese Energy Futures

Lianqian Yin, Bo Liu


This paper aims to study the protocol of hedging practice in Chinese energy futures market with Chinese fuel oil futures and spot data set. The protocol includes selection of theories and models, data diagnosis, hedging periods and its effectiveness. Four models (OLS, VAR, VECM-GARCH and dynamic OLS) are compared through the variance-reduction and mean-variance utility maximization approaches. The empirical study outlines: (1) the effectiveness of hedging strategies has an inverted U shape with the hedging horizons; (2) under utility maximization approach, the portfolio using a dynamic strategy of 10 days’ rebalancing period with VECM-GARCH(2) model can reach a revised Sharpe ratio of 2.95. The improvement of risk/return ratio is significant.


Hedging effectiveness; Chinese energy futures; Dynamic model; Utility maximization;

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